Quote of the Day – Laidler on Monetary Economics & Equilibrium Modeling

David Laidler:

a monetary economy has long been understood by those who have studied it to have properties that cannot be analyzed using the tools of Arrow-Debreu style equilibrium modeling

I’ve laid out the “Hayek-Mises” considerations which establish this fact as a matter of logic to macroeconomists like Stephen Williamson and Nick Rowe. Disturbingly, the run of academic macroeconomists seem to have no professional interest in anything other than “interpreting” or adding new epicycles on the old, failed DSGE models. Whistling past the graveyard, Williamson airily dismisses any identification of anomalies in the DSGE framework — such as those identified by Frydman, Goldberg, Laidler, Buiter, Issing, Woodford, Caballero, and Blanchard — as ‘crackers’. My view is that general public deserves to know about this — if a group of scientists continue to foist a failed and discredited research program on the polity, in service only to its own professional interests, while continuing to do grievous damage to the polity, then the wider public has every right to be told the truth about what is going on in academia, and the fact of deep scientific failure and anomaly in mainstream macroeconomics is no longer merely a private matter among members of a closed and self-serving professional guild.

Sunlight, as they say, is often the best disinfectant.

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6 Responses to Quote of the Day – Laidler on Monetary Economics & Equilibrium Modeling

  1. Nick Rowe says:

    Hang on Greg. Where do you think I got all my ideas from about monetary disequilibrium, and why it matters? My old prof, David Laidler, mostly.

  2. Greg Ransom says:

    Nick, point well taken.

    What you are grappling with certainly doesn’t include you in “the run of academic macroeconomists”.

    I continue to be interested in how the “modeling” of monetary disequilibrium shakes out in your attempt to re-consider and re-cast the foundations of monetary and business cycle economics.

    How far can purely formal constructs take us to “modeling” a monetary economy and the processes of monetary and economic disequilibrium?

    And to what degree do the phenomena of money, finance, and disequilibrium essentially consist of phenomena which lie outside of mathematical constructs?

    When I see you pushing one way or the other as a matter of constructing a thought experiment, it isn’t always clear where you are trying to take things, or where you are ending up. Which is fine.

    It does, however, sometimes blur the edges of were your own considered understanding lie. All in a days, work, of course. We wouldn’t get anywhere if we always knew where we were going .. or where we would end up.

  3. Nick Rowe says:

    Those same questions are ones I ask myself Greg.

  4. Greg Ransom says:

    The answer given by Hayek in economics and Wittgenstein in logic/math/language is that no matter what you stuff as “givens” into the formal construct, with nice stipulated labels, the actual, real world social background which gives meaning to those labels and “givens” cannot be fully captured by a formal construct that has been written or typed onto a paper by a single mind. You can label your construct as an “economy” or as “language X” or as the “science of Y”, etc., but all of these words are puns.

    Learning and changes in judgment is open-ended conceptually and in terms of natural kinds — you can’t capture it with a formal construction or in terms of fixed relations between sets of physical kinds.

    Similarly, our place within a social background of changing relative prices and various supplies and demands cannot be captured in formal construction or in terms of fixed relations between sets of physical kinds — and it is from within just that social context that “agents” (real people) adjust our economics plans, making use of profit and lost signals, along with all of the rest of what we judge to be significant as supplied by that larger social context. You can’t capture this causal adjustment process with a formal construction or in terms of fixed relations between sets of physical kinds.

    Wittgenstein pointed out the same fact as regards training in the use of words and language — can’t capture this training process in which shared understanding is achieved (consisting in part of shared ways of going on together) with a formal logical construct or in terms of fixed relations between sets of physical kinds.

  5. Greg Ransom says:

    To link this up to Laidler, when people adjust their plans using profit and loss signals, they are outside of the fake world on an equilibrium construct, and they are in the domain of “false prices”, i.e. the real world.

    In other words, when people are in the real world where learning in the context of changing price signals powers the causal process of coordination, they are NOT in the fake world of an equilibrium construct — Hayek’s point of 1929, 1936, 1942, 1945, 1948, etc.

  6. Paul says:

    The public does not give a damn whether economists use dsge models or not. But they are aware something is wrong with policy at some level – hence the salience of “end the fed” movements.

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